Senate President Jim King urges an end to Florida loopholes cited in a draft legislative report.
By SYDNEY P. FREEDBERG
Published November 15, 2003
Corporate tax dodging costs Florida as much as $500-million a year, a new report says, and the president of the state Senate thinks it's time to plug some loopholes.
"It just doesn't look fair, and it isn't," that a tiny fraction of Florida's estimated 1.5-million businesses pay virtually all of the state's corporate income tax, said Sen. Jim King, R-Jacksonville.
King, who said he was stunned by the magnitude of the inequities in the tax code, has been talking to business people about it in recent days.
Some are angry, King said, and they have told him, "I don't mind doing my fair share, but it bothers me that others are getting a free ride on the backs of those who are paying."
King's call for a "spirited debate" on the corporate income tax comes as a draft legislative report attributes the tax's decline to a loophole-riddled code that sophisticated companies are working to their advantage.
Corporate income tax collections have been falling as a source of state revenue for years and now account for less than 5 percent of Florida's general revenue.
According to the draft report, a few changes to outdated laws would:
Rein in "tax avoidance strategies" by some companies.
Boost tax revenues by between $238-million and $500-million.
Make it possible to cut the corporate income tax rate from 5.5 to 4.5 percent.
The report by the staff of the Senate Finance and Taxation Committee - "Why Did Florida's Corporate Income Tax Revenue Fall While Corporate Profits Rose?" - offers these answers: legal exemptions, credits and subtractions, changes in federal tax laws and "tax avoidance behavior by corporations."
"If everybody took the attitude, "I don't want to pay a dime,' how would a state or a country survive?" King asked. He said he understands the pressures of the bottom line, but he also thinks companies must pay a fair share for the public services that benefit them.
"Sooner or later we have to have corporate citizenry saying, "I know I have to belly up to the bar,' " he said.
But the Legislature also must "find a fine balance" when tackling reform, King said. "We don't want to create an atmosphere where corporations don't want to come to this state or Florida companies can't be competitive."
The report describes an array of legal techniques some companies use to escape or shave their Florida income taxes: They create tax-free affiliates in Delaware. They shift income to offshore tax havens. They sell their own goods to affiliates at artificially high prices.
"Many features of state corporate income tax laws make it possible for multistate businesses to legally avoid these taxes," the report says. "State and local tax planning has become more important, and corporations have become more adept at exploiting features of state tax structures that allow them to avoid these taxes."
Sen. Walter "Skip" Campbell, D-Tamarac, chairman of the Committee on Finance and Taxation, asked the committee staff to examine the tax amid Florida's daunting budget problems.
"We've identified what really needs to be done to fix the corporate income tax in the state of Florida," Campbell said. "Now the question is, does the Legislature have the fortitude to do something?"
His answer: "I believe the Senate does, but I don't believe the House does."
Rep. Randy Johnson, R-Winter Garden, chairman of the House Committee on Finance & Tax, said he had no formal comment because he has not seen the Senate staff report. But while noting that the key to a functioning tax system is fairness, he expressed some skepticism about changing any corporate reporting rules.
"We are trying to create a friendly environment for business," he said. "And for the business cycle to continue to improve, there has to be a sense of a stable set of rules. The more we tinker with those rules, the more business has a challenge meeting their five- and 10-year business plans and the less sense of calm businesses have with investing in Florida."
Gov. Jeb Bush does not appear inclined to address the issue, either.
After a report about loopholes in the dwindling corporate tax in the St. Petersburg Times last month, Bush wrote a letter to the editor published Nov. 5. Businesses should shoulder their fair share of the tax burden, he said, but Florida should remain a low-tax, business friendly state that encourages job growth.
He didn't directly address corporate tax avoidance.
On Thursday, Bush's spokeswoman, Alia Faraj, reiterated his comments. She said it is misleading to focus on the corporate income tax because businesses pay a "heavy share" of some of Florida's other important taxes: sales taxes, property taxes, gross receipts and motor fuel taxes, among others.
"There are federal and state tax laws that corporations have to abide by," she said in an e-mail. "Any company that violates those laws will be subject to penalties as set forth by those laws."
She didn't address the administration's view on corporations that set up shell companies in Delaware, incorporate in Bermuda or change their business structures to escape tax.
Like Florida, many states face eroding corporate tax bases.
But the draft report suggests that Florida remains especially vulnerable because of its permissive, corporate-friendly laws.
Under the current system, the state allows multistate corporations, which are sometimes composed of hundreds of subsidiaries, to file separate Florida income tax returns for each of the subsidiaries with a presence in the state.
Corporations can essentially control the tax they pay by picking and choosing which subsidiaries file returns. As a result, they can move taxable income from subsidiaries that file returns to subsidiaries that don't have to file returns.
The tax returns report their Florida bottom line: zero (or close to zero). Florida auditors looking at those returns may not realize that all the profits are parked in a shell subsidiary that didn't file a return. And sometimes the wealthy subsidiary will be located in a place like Nevada, which has no tax on corporate profits.
"Many major corporations have implemented tax avoidance strategies that take advantage of states' separate reporting provisions," the report says.
To combat income-shifting, the report recommends that the Legislature dump the separate-reporting system in favor of new reporting rules.
Under so-called "combined reporting," Florida would make multistate companies disclose the profits of all their subsidiaries regardless of location in the United States.
Then, a formula already used in Florida would be applied to the full amount of profits listed in the combined report to determine how much of those profits are taxable in Florida.
Simply put, the adoption of combined reporting would make it more difficult for corporations to shift profits out of Florida artificially and reduce their tax liability, the report says.
At least 16 states require companies to use combined reporting, and some businesses in Florida already use it.
The draft report also suggests that the Legislature rethink exemptions that allow certain types of companies, notably Subchapter S corporations and limited liability companies, to escape the corporate income tax.
Such companies, many of them Florida-based, cost the state more than $700-million a year in possible tax revenue.
"These entities have grown much faster than taxable corporations, and their tax-exempt status represents the largest limitation to Florida's corporate income tax revenue," the report says.
Campbell has scheduled the committee's first meeting on the staff recommendations for Thursday in Tallahassee.
About Florida's corporate income tax
Eighty-seven percent of Florida's 1.5-million businesses are not required to file a Florida income tax form, much less pay the tax.
Of the 238,455 companies that did file corporate income tax returns in 2001, 213,890, or nearly 90 percent, paid nothing.
Just 5,303 companies - 2.2 percent of those that filed - paid 98 percent of the taxes.
Corporate income tax collections as a percentage of state general revenue - now at less than 5 percent - are at their lowest point since 1972-73, the first full year of the tax.
- Sources: Florida Department of Revenue, Senate Finance and Taxation Committee, Times research
